Wage Formation in Sweden 2010

Modest pay settlements to soften effects of downturn

Hourly earnings in the business sector are expected to rise by an annual average of 2.3 percent in 2010-2012. The pay increases are modest by historical standards, which will benefit employment. Unemployment is expected to remain high until 2014, however. As an effect of the economic downturn, employment has fallen more for men than for women, whereas women have left the labour force to a greater extent.

As with hourly earnings, labour costs in the business sector are expected to rise at an annual rate of 2.3 percent in 2010-2012. The increase in labour costs will fall within the interval of 1 to 2.5 percent, which according to the NIER is optimal for output and employment.

With demand now surging and the economy recovering, firms can more efficiently deploy their resources, such as personnel and machinery. Productivity will therefore improve rapidly in the next few years. However, the drop in labour productivity between 2007 and 2009 will lead to a permanently lower level of productivity than otherwise. Higher productivity growth during economic recovery can only partly compensate for the loss of productivity incurred in years 2007 through 2009.

In Sweden, the employment rate is between 85 and 90 percent for persons aged 30-54 with an upper secondary or post-secondary education. But for those with an education below the upper secondary level, the employment rate is considerably lower, just over 75 percent for men and barely 65 percent for women. On the other hand, the average pay for this least-educated group is just marginally less than for individuals with an upper secondary education.

This may be an indication of a poor capacity of the Swedish labour market to generate jobs for groups with limited education or low productivity for other reasons. An analysis of various groups outside the labour market and without employment suggests that high minimum wages may tend to curtail employment for such groups. This calls for caution in raising minimum wages and for a labour market policy that enhances skills.

In the current recession, employment has dropped more for men than for women, whereas women have left the labour force to a greater extent. The explanation is that manufacturing, where men predominate, has been hit harder than other sectors. The segregated labour market also affects the earnings gap between men and women. The differences are linked to the frequently higher earnings in occupational groups where men predominate.

Differences in pay between women and men have changed little in recent years. In the 2007 pay negotiations the Swedish Trade Union Confederation (LO) obtained acceptance of a gender-equality wage increment that would be used to raise earnings of women with low pay in occupations where women predominate. An examination of how the pay gap between women and men has evolved since then suggests that the low-wage increment may initially have had the desired effect. After year 2008, however, the effect has mostly evaporated.